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Page added on March 10, 2013

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Oil’s average price posts new records and they’re telling us it’s abundant!

Consumption

It is a slick piece of public relations to convince people to disregard what is right in front of them and believe the opposite. And yet, that is what the oil industry has achieved with an oh-so obviously coordinated campaign to tell the public and policymakers that there is no need to be concerned about future oil supplies.

Many people remember the price spike of 2008 which shot prices to an all-time high of $147 a barrel. Oil subsequently crashed all the way down to about $35 at the end of that year as a brutal contraction gripped the global economy. But, oil has subsequently been making new all-time highs when you consider the yearly averages.

U.S. drivers should not be that surprised by this for they paid average daily gasoline prices that were higher in 2011 and 2012—$3.53 and $3.64 per gallon respectively—than they did in the previous record year of 2008 when they paid an average of $3.26, according to the U.S. Energy Information Administration (EIA).

Brent Crude, which has become the de facto world benchmark price for crude oil, has also just posted back-to-back years of record prices, higher than even the average daily price in the fateful year of 2008. In that year Brent achieved an average daily price of only $96.94 according to the EIA. But, in 2011 the average daily price was a record $111.26—which was followed by another record in 2012 of $111.63. The price in 2013 has so far averaged about $114.

It is true that the American benchmark crude—Cushing, Oklahoma West Texas Intermediate—has been trading at a discount to Brent Crude. This is because Cushing, one of the country’s largest oil depots, is being flooded with supplies from North Dakota and the Canadian tar sands, supplies currently unable to find their way to a seaport that would connect them with world markets and thus world prices. An operator I know in Houston said that rather than send his production to Cushing where the discount is between $20 and $25, he is happy to put his oil on a barge and send it to Louisiana where he has consistently been getting prices over $100.

As it turns out, most inhabitants of the globe pay prices reflective of the Brent Crude price, and that’s why it is frequently quoted as the world price.

So, how is that the public and many policymakers have swallowed the abundance argument even though the evidence of prices suggests the opposite? The industry has made its case by saying that newly accessible tight oil deposits in North Dakota and elsewhere are going to vastly expand oil production. It has coaxed Wall Street firms with whom the industry does business to put out rosy forecasts; it has made an army of paid think-tank propagandists available to the media; it has convinced government agencies that the future is bright; and, in one case, it sent one of its own to Harvard to write an industry-funded report that says everything will be fine—in the future!

You will notice one theme here. The industry’s case for abundance rests not on a current glut or a downward sloping oil price chart, but rather on the promise of abundance at some indeterminate time in the future, that is to say, on magical forecasts. But colorful charts and cheery prognostications are not facts. And, as always, it is important to consider the source.

Keep in mind that what a good magician does is not really magic. Rather, a good magic show is based primarily on misdirection. Get the audience to look in the wrong place while you do your handiwork unobserved.

And, so it is with the oil industry. It has been able to get the public and policymakers to focus on marginal gains in U.S. oil production while ignoring declines in the rest of the world. Mathematically speaking, that is how it must be since the rate of worldwide oil production has been essentially on a bumpy plateau since 2005. As U.S. production has grown, production in the rest of the world as a whole has declined by about the same amount.

Now, that wouldn’t matter quite so much if oil were not traded in a world market dominated by large countries that are still huge importers of crude oil. But, the other fact that the industry PR magicians don’t want you to focus on is that global net exports of oil—that is, the oil available on the world market to importers such as the United States, China, Japan, India and much of Europe—has been shrinking since 2006. The global competition among importers for those shrinking exports has been a major factor in sustaining record prices for the past two years.

It is worth keeping in mind that all of this is happening as the so-called fracking “revolution” is proceeding, as record investment in oil exploration and development continues, and as consistently high prices drive the necessary profits for all this effort. And yet, the impact on supplies worldwide has been almost imperceptible.

In fact, as John Westwood, chairman of the energy consulting firm Douglas-Westwood, explained in a slide presentation, it is becoming exceedingly difficult to add new oil production capacity. Some $2.4 trillion in oil industry capital expenditures from 1994 to 2004 increased the worldwide rate of oil production by 12 million barrels per day. However, $2.4 trillion in capital expenditures spent from 2005 to 2010 resulted in a decrease in the rate of oil production of 200,000 barrels per day. (See slide 8 of Westwood’s presentation.)

I am reminded of the late comedian Richard Pryor who, when caught by his wife in bed with another woman, explained that things weren’t what they seemed. When she resisted his explanation, he asked her, “Who you gonna believe? Me or your lyin’ eyes?”

Once you’ve seen the troubling facts about flat global oil production, shrinking global oil exports, and record high prices, about all the industry can do is insult your intelligence by asking the same question.

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9 Comments on "Oil’s average price posts new records and they’re telling us it’s abundant!"

  1. John Baldwin on Sun, 10th Mar 2013 8:21 pm 

    The author is off the pace – worth looking at actual production of oil and gas in the US

    The author needs to get up to speed in the fracking and horizontal drilling combo

  2. Beery on Sun, 10th Mar 2013 9:21 pm 

    John, increased production in the US has not managed to reach the 1970 peak of oil production, nor is it likely to do so. In terms of world production, the US is a drop in the bucket. As the author says, when the price keeps rising, that means that oil supply is not keeping pace with demand. That’s a fact.

  3. Dmyers on Sun, 10th Mar 2013 10:31 pm 

    The age-old principle of supply and demand is operative in the oil market. By that reckoning, increasing supply would reduce prices.

    Is there another factor which carries more weight in the situation than does the growing supply and counteracts the growing supply? How about cost of production? Even if supply were growing, the cost of production must throw its weight into price determination. Fracking adds a layer of cost that will be factored in at some point.

    I mention this because, even in these annals, it seems oil prices are generally discussed in supply/demand context. Another factor in the oil price is fracking itself, on its face an expensive intervention which owes itself to the absence of easy to get/cheap to produce sources. Supply growth will not reduce prices if the supply being grown has a relatively/historically high cost of production.

  4. J-Gav on Sun, 10th Mar 2013 10:32 pm 

    The conclusion of the article (which I always read first) seems valid to me here. Lotta hocus-pocus goin’ on. And we aren’t even talking natural gas, where 1000s upon 1000s of new wells will have to be drilled in the coming years in order to ‘keep pace.’

  5. J-Gav on Sun, 10th Mar 2013 10:42 pm 

    The conclusion of the article (always read conclusions first to save time, then the article, if …) seems valid to me here. Lotta hocus-pocus goin’ on. And we aren’t even talking natural gas, where 1000s upon 1000s of new wells will have to be drilled in the coming years in order to ‘keep pace.’

  6. GregT on Sun, 10th Mar 2013 10:46 pm 

    Dmyers,

    You have hit the nail on the head. Not only have production costs increased, quality has decreased. As we run out of the light, sweet, stuff, the costs will continue to rise as we become more and more dependant on the dregs.

  7. PrestonSturges on Sun, 10th Mar 2013 11:15 pm 

    >>>The author is off the pace – worth looking at actual production of oil and gas in the US

    Down 50% since the mid-70s.

    I think this is the 2014 elections kicking off. We had Dick Cheney’s neocon sock puppet David From singing the cornucopian hymn last week.

  8. BillT on Mon, 11th Mar 2013 1:07 am 

    “The future will be rosy, IF…”
    “Electric will be too cheap to meter.”
    “Automatic highways are in your future.”
    “Fusion energy is right around the corner.”
    “Radiation is good for you.”
    “There’s nothing to fear but fear itself.”
    “Iraq has WMDs.”
    “Mission accomplished!”
    The lies go on and on…

  9. GregT on Mon, 11th Mar 2013 5:25 am 

    BillT,

    Yup, Tell a lie often enough, and it becomes the truth………………………Until reality sets in.

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